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Policy Drove The Recovery From The Great Depression

I half agree with the sentiments in Ezra Klein’s Bloomberg column about the importance of the 2012 election, but I think there’s a dangerously misleading idea lurking there. He quotes Larry Bartels’ brilliant exposition of the point (see this PDF but also this one) that you have to put FDR and the New Deal realignment in comparative perspective. All governments that were in office when the Depression hit lost power, and all governments that were in office during recovery regained it. The implication in the column seems to be a kind of nihilistic one, where economic outcomes are just driven by luck and a bad recession just so happens to take a long time to recovery from. This is partly true, perhaps, in the case of small open economies but large economies are primarily custodians of their own short-term destinies. A long recession is a recession to which policymakers mounted an ineffective response. Herbert Hoover did have bad luck relative to (say) Warren Harding but he also had bad policy relative to Franklin Roosevelt.

Now to be clear, what’s at issue here is “bad policy” in a very narrow sense of policy that was made for growth of output and income. In broader terms, the policies of Adolf Hitler were far inferior to those of his predecessors in Germany. But the Nazi regime, under the leadership of Hjalmar Schacht, implemented highly effective monetary policies just as the Roosevelt administration used Executive Order 6102 and other monetary measures to produce recovery. Similarly, the recession of 1937 wasn’t just bad luck for Roosevelt, it was bad policy. Very ideologically distinct governments in Sweden and Japan abandoned policy orthodoxy very quickly during the Depression era and growth returned quite swiftly. France, by contrast, never really abandoned orthodoxy and never really recovered. It’s true that Canada was heavily buffeted by trade policy shifts in the United States and United Kingdom rather than driven by purely internal factors, but that’s an idiosyncratic fact about Canada’s place in the world.

Which is all to say that my view is that it’s true that the next president will have the opportunity to pass a bunch of controversial legislation, much of it unrelated to the recession, and then have both his person and his policies be rendered popular by a robust economic recovery. But the existence of some policies that promote robust recovery from the recession is a necessary ingredient to that mix. The policies we got in 2008 and 2009 were pretty good — they prevented calamity — but they didn’t promote robust recovery and that, rather than bad timing, is why Obama hasn’t benefited from an FDR effect. And whoever’s president in 2013 will have an opportunity — but just an opportunity — to do better on that score. You still need policies that work. It’s entirely possible that we’ll simply shift into a new equilibrium with a permanently elevated pool of long-term unemployed, permanently reduced labor force participation, slow growth, and stagnating living standards.